Tax Type
Retail Sales and Use Tax
Description
Construction; Water clarifier
Topic
Taxability of Persons and Transactions
Date Issued
01-24-1997
January 24, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear********
This will reply to your letter in which you request a ruling as to the application of the retail sales and use tax to a construction project of ****** (the "Taxpayer").
FACTS
The Taxpayer, a real property construction contractor, has contracted with a Virginia corporation to expand it's industrial processing facility in Virginia. Included in the expansion is the construction of a clarifier used in the manufacturing process. The clarifier is a cylindrical tank with an auger mechanism which separates water from the residual by-product of the manufacturing process. The reclaimed water is then re-used in the production process. The contract between the Taxpayer and the manufacturer provides that the scope of work includes, but is not limited to, the furnishing and installing of all materials, labor, and equipment required to construct the reinforced concrete and related structural elements of the clarifier as well as a pumping station. The Taxpayer is requesting a ruling on the application of the retail sales and use tax to material used in the performance to the contract.
RULING
Code of Virginia § 58.1-609.3.2 provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefore or replacement thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale". The term "used directly" is defined in Code of Virginia § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance and administration". (Emphasis added).
Virginia Regulation (VR) 630-10-63.B.2, copy enclosed, expands on the definition of "used directly" as it relates to industrial manufacturing and processing, and further defines the "integrated manufacturing process" as follows:
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- The concept of the integrated manufacturing process includes within the scope of the manufacturing and processing exemption machinery, tools, repair parts, fuel, power, energy and supplies used directly to manufacture or process fuel, power or energy used to run exempt production machinery or to manufacture exempt production machinery, tools or supplies. In essence, an exemption is available for subprocessing activities which produce tangible personal property used directly in the main manufacturing or processing activity. (Emphasis added).
Based on the information you have provided, I find that the clarifier used by the manufacturer qualifies for the sales and use tax exemption as being machinery used to reclaim a supply, i.e. water, used directly in the manufacturing process. Therefore, the clarifier and related equipment would be exempt from the tax.
In regard to the reinforced concrete and related structural elements installed by the Taxpayer, VR 630-1 0-63.C.2 sets forth those activities which constitute "production" and states the following:
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- Ancillary activities such as plant construction are not a part of production and are taxable. Accordingly, construction materials such as concrete, structural steel, and roofing which becomes permanently incorporated into the production plant and machinery and tools used in the construction of the plant are taxable.
Steel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax. However, concrete floors or foundations on which such supports rest or to which machinery is bolted, and structure housing machinery are not used directly in manufacturing and processing and are subject to the tax.
Based on the above, and the information provided in your letter, the reinforced concrete and other structural elements do not qualify for the industrial manufacturing exemption. The Taxpayer would be required to pay the sales tax to their supplier, or accrue the use tax, on structural materials going into the job.
The Taxpayer may apply to the department for a Form ST-11A Sales and Use Tax Certificate of Exemption. This exemption certificate is issued by the department to real property construction contractors who are installing exempt production machinery (e.g. the clarifier).
This is a limited use exemption certificate that must be approved and issued by the department.
If you should have any questions concerning this ruling, please contact ****Office of Tax Policy, at******
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11580K
Rulings of the Tax Commissioner